The Trump Reality

He may be the highest variable nominee in American history.

With his victory in the conservative heartland of Indiana, Donald Trump is the likely Republican nominee for President. A plurality of GOP voters has rejected the strongest presidential field in memory to elevate a businessman of few fixed convictions and little policy knowledge who has the highest disapproval ratings in the history of presidential polling. Now what?

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Mr. Trump wasn’t our first choice, or even the 15th, but the reality is that more GOP voters preferred him to the alternatives. Dozens of miscalculations made his hostile takeover possible, not least decisions by other candidates in the early primary states to attack each other instead of Mr. Trump. Ted Cruz and his allies also prepared the ground by stoking rage against “the establishment” and immigrants, only to have Mr. Trump hijack their stage-managed rebellion as a more convincing restrictionist. (See nearby.)

Yet GOP voters made the ultimate decision, and that deserves some respect unless we’re going to give up on democracy. The GOP electorate had its chance to reconsider Mr. Trump after his Wisconsin defeat a month ago. Instead the voters rallied behind him for seven straight wins with a majority in each state.

The most hopeful way to look at this is that GOP voters see Mr. Trump as the vehicle for American revival. They are at heart nationalists who see the U.S. in retreat abroad and the economy failing to raise wages at home, and they are revolting against both. Unlike the Japanese or the French, they aren’t going to accept decline without a fight.

In that sense they hope Mr. Trump will be another Ronald Reagan,who can storm Washington and overturn the status quo. This may be one reason so many of Mr. Trump’s voters are older Americans who recall the failures of the 1970s and the Reagan revival that followed.

The problem is that Mr. Trump is no Gipper, who had spent 40 years developing a philosophy of limited government and the U.S. national interest. As his letters show, he had superb instincts about the major issues of his day and was a brilliant political strategist. Mr. Trump is a clever political tactician, but his policy and rhetorical jaunts don’t lead to anything coherent we can detect beyond his desire to “do great deals.”

This might be a silver lining if he wins in November, assuming Republicans keep their House and Senate majorities. Congress would write the tax and health-care reform bills, and our guess is Mr. Trump would accept nearly anything once he got his “wall” at the border. An economic growth revival is more likely with President Trump than President Clinton.

The New Yorker’s foreign-policy instincts are far more troubling. He shares President Obama’s desire to retreat from global leadership even if he couches retreat in “America First” clothing and a larger defense budget. He’d have to deploy far more military force than he claims to subdue Islamic State, and he is naive about the challenge to Europe posed by Vladimir Putin. His trade policies are reckless and would either be rebuffed by the world or lead to a global recession.

All of this assumes Mr. Trump can win the election, which he promises he will do “easily” despite his unprecedented negatives. His main reason for optimism is that Hillary Clinton is almost as disliked as he is. But she will benefit from a largely unified Democratic Party, and Mr. Trump has divided Republicans while doing his best to alienate swing voters, especially “the Hispanics,” as he likes to say, and “the women.”

Mr. Trump may be able to improve his image if he controls his perpetual insult machine, but there is little evidence that he can or will do so. The essence of his politics is personal, and it’s not obvious he knows any other way.

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The upshot is that Mr. Trump would be the highest variable presidential nominee in history. He has a chance to win, but he could also alienate or frighten so many voters that he loses in a landslide and takes the GOP House and Senate majorities along for the slide. Republicans across the country will have to make their own calculations about supporting Mr. Trump, but one priority should be limiting the down-ballot damage from a Trump washout.

One temptation to avoid is purging every Republican who fails to denounce the Trump candidacy. This is an election, not the Spanish civil war. There’s a world of difference between a Chris Christie, who endorsed Mr. Trump when he was still stoppable, and Paul Ryan, who has a position of responsibility and will have to steer Mr. Trump in the right direction if the businessman wins—or rebuild the GOP if Hillary Clinton wins.

Note that the political left is now echoing the conservative pundits who want to brand every Republican with a scarlet “T.” They know Mr. Trump lacks a governing philosophy. But they want to use him to undermine conservative ideas as an alternative to their vision of the redistributive state. They also hope to use Mr. Trump as a battering ram to take back Congress and destroy reform Republicanism in the states for a generation. Conservatives shouldn’t abet this strategy, even as they explain to voters the difference between Ryan conservatism and the Trump caricature of it.

Our own approach during the next six months will be to scrutinize Mr. Trump as we will Mrs. Clinton—with an eye on what is in the best interest of free people and American prosperity. As unappealing as this election choice is, one of them will be the next President. We have to make the best of that reality.

Only 38% of the money managers in our latest survey are bullish on the outlook for stocks. And they think Clinton will beat Trump.

By Jack Willoughby

Only 38% of Big Money poll respondents say they are bullish or very bullish about stocks today, down from 55% in last fall’s survey. The spring 2016 poll is one of the least bullish ever. Illo: Scott Pollack for Barron's

The Dow Jones Industrial Average topped 18,000 last week for the first time since July, cause for celebration on Wall Street and in the press. But the market’s progress from here could be more grudging than the high-fives and cork-popping suggest.

That’s the message of Barron’s latest Big Money poll, which finds only 38% of money managers bullish or very bullish about the prospects for stocks in coming months, down from 55% in last fall’s survey and 45% last spring. The current reading is perhaps one of the least bullish in the poll’s more than 20-year history, a reflection of the market’s lofty valuation.

Instead of a rousing encore for the bull, most managers see only a modest rise in stock prices in the year ahead, possibly punctuated by a dramatic, if temporary, setback. Indeed, two-thirds of poll respondents say stocks could fall by 10% or more at some point during the next 12 months, probably in response to disappointing corporate profits.

The market will reward judicious stockpickers more than index followers, the managers predict, and value stocks will gain a decisive edge over growth-oriented issues. AppleAAPL in Your ValueYour ChangeShort position (ticker: AAPL), which trades for $106, or less than 12 times expected earnings, is the Big Money crowd’s favorite stock this spring; Barron’s called it “crazy cheap” in a recent feature (“Why Apple Is Worth $150 a Share,” April 9).

Here’s another poll finding: Nearly two-thirds of Big Money managers predict Hillary Clinton will be the next U.S. president. But 38% of this Republican-leaning crowd favor John Kasich; 18% would vote for Donald Trump; 11% would pick Ted Cruz; and 14% prefer professed noncandidates Michael Bloomberg or Paul Ryan.

THE BIG MONEY BULLS predict that the Dow industrials will end this year at 18,056, just about even with last week’s level, and tack on 4% in next year’s first half, to 18,756. They see bigger gains for the broader Standard & Poor’s 500 index, which could rise 9% through next June, to 2277, and the Nasdaq Composite, which could advance almost 7% through mid-2017, to 5231.

Scott Schermerhorn, chief investment officer of Granite Investment Advisors, is among the more bullish participants in our latest survey; he expects the Dow to end this year at 19,500 and be at 21,070 in June 2017. “The U.S. economy is strong and getting stronger, whereas China is slowing, and Brazil is in trouble,” he says.

Schermerhorn, whose firm manages $700 million, also cites a leadership change in the market that is bound to create opportunities for investors. “The air is getting let out of the momentum stocks that so dominated performance last year,” he says. “Now more boring, well-run companies that had been ignored are finding new admirers. And how can people say the market is overvalued, when energy has just come off one of the worst bear markets in history?”

Stephen Drexler, a senior portfolio manager at Wells Fargo Advisors in Colorado Springs, Colo., with $440 million under management, is also bullish, if less exuberantly so. He expects the Dow to finish the year around 18,000 and to advance to 18,850 by mid-2017 as quarterly earnings comparisons improve. “We’re in a low-return environment,” he says. “If you can eke out a 5% return and a 2% dividend yield, that’s good. With zero-percent interest rates, people have to moderate expectations.”

To Fla Lewis, a principal at Weybosset Research and Management in Providence, R.I., which oversees $170 million, negative sentiment is itself a bullish indicator. “The psychology today isn’t what you see at market tops,” he says.

Lewis notes that in spite of a general agreement that the market is fully valued, it is possible to find well-run companies with solid balance sheets and good management priced at a steep discount to their worth. Canadian National Railway (CNI), he notes, was trading in January at $47, or just 11 times this year’s expected earnings. The stock has rebounded sharply since then and now fetches $66.

Lewis thinks Express Scripts Holding ESRX in Your ValueYour ChangeShort position (ESRX), a pharmacy-benefit manager, is another candidate for liftoff. The stock sells for $73, or 12 times this year’s forecast profit; he expects it to trade up to $100 a share in the next year, propelled by a favorable resolution of a dispute with AnthemANTM in Your ValueYour ChangeShort position (ANTM), a managed-care provider and major customer.

IF THE BULLS’ RANKS shrank in our latest survey, the neutral camp exploded in size, to 46% of respondents from 29% last fall. A lack of bullish or bearish conviction was apparent in answers to many Big Money questions, and evident in follow-up conversations with poll participants. For example, 62% of Big Money managers consider the market fairly valued today, up from 54% last fall. Twenty-six percent say stocks are overvalued, and only 12% say they’re undervalued.

Fence-sitting also is common among the managers’ clients; 70% indicate their clients are neutral about the market at recent prices, 19% view their clients as bearish, and just 11% consider them bulls.

The Big Money pros still favor equities over other asset classes, but by a slimmer margin than last fall—54% to 63% back then. Ten percent consider real estate the most attractive asset class, roughly on par with 6% six months ago. Fixed income still tops the list of least-attractive assets, but by 46% of votes, down from 51% in the fall.

Just over half of the managers expect equities to be the best-performing asset class in the next 12 months, down from 61% last fall. They also consider gold a rising star.

AMONG EQUITY MARKETS, the U.S. still has the brightest prospects, according to more than half of poll participants. But nearly a quarter expect emerging markets to do best, and 14% are betting on a top showing by European stocks. On the flip side, 40% expect China to be the worst performer among major markets in the coming 12 months.

Jeff Schoenfeld, a partner at Brown Brothers Harriman in New York, which manages billions of dollars across asset classes, calls himself neutral on stocks these days. He expects equity returns in the single digits and regards pessimism about U.S. growth as unwarranted. “Consumers are well-fortified by strong job growth, moderate income growth, record household wealth, rising home prices, relatively high consumer confidence, and the equivalent of a major tax cut in the form of lower energy prices,” even though they have yet to spend the benefit, he says.

Yet, “we’re in an environment of modest returns dictated by high valuations in stocks and record-low interest rates,” Schoenfeld adds. “The math tells you that it’s hard to generate returns at these levels.”

David Villa, chief investment officer of the State of Wisconsin Investment Board, which oversees $100 billion, also says he’s neutral on stocks. “The economy is growing slowly,” he says. “I don’t see a recession; I don’t see a bad environment. But there are debt defaults to come, particularly in the oil patch. Compensation for risk is below normal in this market, so we want to maintain a lower risk profile.”

Villa sees stocks tumbling later this year on lower-than-expected earnings growth, before rising again in the first half of 2017. He predicts tech stocks will struggle after several years of strong performance, while shares of consumer-staples companies that produce steadier earnings growth could do well.

BARRON’S CONDUCTS the Big Money poll twice yearly, in the spring and fall, with the help of Beta Research in Syosset, N.Y. The latest survey, e-mailed in late March, drew responses from 110 money managers across the country, ranging from some of the largest public pension funds to smaller investment boutiques. The Dow has rallied 4%, and the S&P 500 about 3%, since the survey was sent to Big Money participants.

The nation’s money managers no longer seem concerned about the near-term threat of an economic recession; more than 75% expect the global economy to strengthen or continue growing at its current pace. Seventy percent look for U.S. gross domestic product to increase by 2% or 2.5% in the next 12 months, and 9% predict GDP gains of 3% or 3.5%. Only 12% expect the U.S. to slip into a recession next year.

About two-thirds of respondents say corporate earnings will rise this year, but most expect muted gains of 1% to 5%. More than 80% see higher earnings next year, however, with nearly half forecasting profit growth of 6% to 10% in 2017.

The managers expect stronger earnings, not richer price/earnings ratios, to power stocks’ advance next year. Only 26% look for the P/E on the S&P 500—16.5 times when the survey was distributed—to rise in the next 12 months.

The market for initial public offerings has been subdued in recent quarters, consistent with volatility and price pressure in the broader market. Some 43% of poll respondents see IPO demand escalating in the next 12 months, with one noting in written comments that the dissipation of recession fears bodes well for the new-issue market. But another manager stated that money “flowing out of actively managed funds” suggests reduced demand for IPOs.

Among investment vehicles, the Big Money pros are most positive on the outlook for low-cost exchange-traded funds, which have been steadily gaining popularity among retail investors. They are most negative on hedge funds; some prominent ones have stumbled badly in the past year. Mutual funds elicited mixed sentiment, with 58% of managers positive on their prospects and 42% negative.

THE BEARS’ CAMP STAYED CONSTANT in our latest survey, at 16% of respondents, and their forecast is grim. They expect the Dow to plummet to 16,450 by the end of the year and remain around that level in the first half of 2017. They see the S&P 500 trading at 1898 next June and the Nasdaq Composite priced at 4372, about 10% below recent levels.

According to roughly a fourth of respondents, subpar earnings are the biggest threat to stocks’ advance. Another 20% or so worry most about an economic slowdown or recession, while 15% cite continued economic and market turmoil in China. Most Big Money managers expect the Chinese economy to grow by 5% to 6% in the next year, although some 25% look for GDP gains of 4% or less. Beijing officially has targeted growth of 6.5% to 7% this year.

Matthew Clark, state investment officer at the $13 billion South Dakota Investment Council, says he’s mildly bearish about stocks. He reckons the S&P 500 could end the year around 1870 and tick up to 1900 by mid-2017. Clark thinks stocks are overvalued by about 10%; valuation concerns recently prompted the fund to lower its equity stake to 63% from 70%. Even so, it’s buying energy stocks, as it considers oil undervalued at a recent $43 a barrel.

Neil Rose, chief investment officer of Cadinha, a Honolulu firm with about $1 billion under management, says he’s worried about “stretched valuations” and “serious structural economic problems” abroad. And, because of the uncertainty surrounding the presidential campaign, he is “uncomfortable leaning forward without knowing what the rules of the road will be.” Rose sees the Dow retreating to 16,000 by year end and to 15,500 in the first half of next year. He has 20% to 25% of the firm’s assets in cash and 20% in Treasury bonds.

THE BIG MONEY MANAGERS used to spell fear “F-E-D,” a reflection of their worries about how poorly stocks might perform when the Federal Reserve finally ended its quantitative-easing, or asset-buying, program to drive down interest rates. In America, at least, QE ended in the fourth quarter of 2014. Since then, the focus has been on when the central bank might start raising rates again.

The Fed hiked its federal-funds rate target by a quarter of a percentage point in December and signaled at that time that it might lift rates four more times this year. But it passed on a rate hike in the first quarter, citing global economic conditions, and interest-rate expectations have been falling ever since. Thirty-seven percent of Big Money managers now look for just one rate increase this year, and 50% expect two; only 9% think rising rates will pose the biggest threat to stocks this year.

Most managers expect the 10-year Treasury bond to yield 2% to 2.5% one year from now, up from 1.89% last week. About half put the 10-year yield at 3% to 3.5% in five years, suggesting a gradual ramp-up in rates. Sixty percent of the managers expect their fixed-income portfolios to generate positive total returns this year, up from 52% last fall.

But the Big Money men and women are plenty worried about the harm that could follow from Europe’s and Japan’s negative interest rates. “They punish the banks and don’t stimulate demand for credit, which is what is really needed,” one manager wrote in the survey’s comments section.

John Charalambakis, managing director at BlackSummit Financial Group in Nicholasville, Ky., is particularly worried about the relatively thin capital cushions of Europe’s largest banks—and their rising loan losses. He expects the Dow to fall to 15,300 by next June as stresses mount in the international financial system.

BACK AT HOME, the Big Money managers see sector and style rotations reshaping the market and offering opportunities for nimble investors. Eighty percent expect value stocks to outperform growth shares in the next 12 months, a trend highlighted last month in a Barron’s cover story (“Move Over, Facebook and Netflix: Value Investing Is Rebounding,” March 12).

“Since the beginning of the year, momentum stocks have lost momentum,” says Schermerhorn, of Granite Investment Advisors. “Investors are starting to pay attention to value again. At the end of the first quarter, the FANG stocks— FacebookFB in Your ValueYour ChangeShort position [FB], Amazon.com [AMZN], NetflixNFLX in Your ValueYour ChangeShort position [NFLX] and AlphabetOOGL in Your ValueYour ChangeShort position [GOOGL]—were down 5%, on average. Whenever a group of stocks gets named, [the trend] is over.”

Poll participants spot ample value in the oil patch these days; 28% expect energy stocks to lead the market in the coming year, nearly twice the percentage predicting energy will bring up the rear. “We are already starting to see an uptick in drilling, even at current [oil and gas] price levels,” says Charles Lemonides, founder of ValueWorks, a New York–based hedge fund that oversees $200 million. “Economics have improved in every basin in the country.”

Lemonides expects the Dow to land at 19,900 by next June, but doesn’t rule out “bumps in the road” on the way to that rarefied level, as “more air” comes out of momentum stocks.

The Big Money managers also favor the outlook for financials and health care. They are split as to whether basic materials, long out of favor, will be the market’s leader or laggard, and they are downright bearish on the prospects for utilities.

THE MANAGERS’ favorite stocks span numerous industries. In addition to Apple, they include tech heavies Cisco Systems SCO in Your ValueYour ChangeShort position (CSCO) and MicrosoftSFT in Your ValueYour ChangeShort position (MSFT), and ExxonMobilXOM in Your ValueYour ChangeShort position (XOM).

HuntsmanHUN in Your ValueYour ChangeShort position (HUN), a chemical company, also is among the managers’ top picks this spring. The shares fell 50% last year, but have rallied 34% in 2016, to a recent $15.22, and yield 3.3%. Huntsman is planning to dispose of its pigments unit via a sale or IPO. William Smith, the chief investment officer of New York–based Battery Park Capital, with $340 million under management, puts the company’s breakup value at $25 a share.

Which stocks are most overvalued? Tesla MotorsTSLA in Your ValueYour ChangeShort position (TLSA), trading at 86 times next year’s expected earnings, is No. 1 with this crowd. FANG members Netflix, Facebook, and Amazon.com also look extended, they say. Even Campbell SoupPB in Your ValueYour ChangeShort position (CPB), historically a defensive issue, looks too pricey to some Big Money pros at roughly 20 times fiscal 2017 estimated earnings, well above its historical P/E of 15.9.

“People have flooded into safety stocks, expecting a recession,” says David Becker, a portfolio manager at Northern Oak Wealth Management in Milwaukee, with $600 million in assets.“Now that the chances of that are lower, expect money to flow out.”

While a stronger economy could mean more interest in stocks, rich valuations could limit the upside from here. The Big Money managers will have to work hard to deliver big gains for clients this year.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.